United Kingdom

United Kingdom

Market forces start setting true value -- Wind power rates on the rise

Prices paid for power from renewables under Britain's latest on-line auction of green energy have more than doubled since the previous auction six months ago. An average price of £0.0644 was paid for 223 contracts totalling 577 MW of electricity from renewables. It compares with an average of £0.0281 in August 2001.

The auction was held at the end of January by the Non-Fossil Purchasing Agency (NFPA) to dispose of output from projects contracted under the obsolete Non-Fossil Fuel Obligation (NFFO). The six month contracts run from April 1 to September 30. They were won by just seven bidders.

The high prices are believed to be due to the anticipated shortage of renewable energy output during the first months of the UK's new renewables obligation. This requires electricity retailers to buy a proportion of their power from renewable sources, starting at 3% from April 2002, rising to 10% in 2010. "There is a serious shortfall of capacity in the short term," agrees Ben Warren from Ernst and Young.

The NFFO auction is regarded as an indicator of the value of green electricity under the renewables obligation. However, the auction prices far exceed those of many contracts currently being negotiated. Warren explains that under typical contracts for renewables output, generators can expect to get 70-85% of the value of the renewables obligation certificate (ROC) -- and of the value of exemption from the UK climate change levy -- on top of the wholesale price of electricity. The climate levy is imposed on businesses.

Seven cent power

The value of the ROC is set by the £0.03/kWh penalty on suppliers who fail to buy enough renewable energy output to meet the obligation; the levy exemption certificate (LEC) is worth £0.0043/kWh, and the wholesale price is around £0.019/kWh. This gives a value of between £0.045/kWh and £0.048/kWh for renewables (EUR 0.0735-0.0784/kWh.

According to Warren, the auction results reveal a couple of interesting trends. "I think the ROC payback price -- or "smear-back" -- has been included in the auction prices," he explains. This amount is paid to suppliers complying with the obligation from the penalties levied on suppliers who fail to meet their obligations. The auction shows it amounts to more than £0.01/kWh, he adds.

There also appears to have been a pricing of the volatility of power in the latest auction, he says. The comparative rise in prices for landfill gas and biomass and the lower price for wind indicate that suppliers are factoring in the penalising effects of NETA on the intermittency of wind, he points out. Whether wind will realise the full £0.019/kWh wholesale price component in future contracts is open to negotiation," he says, given the trends seen in the NFFO auction prices. Warren advises generators -- particularly of new projects -- to carefully manage their own auctions of their Power Purchase Agreements. "There is not just one product they are making, there is a host of products and they should market them to maximise the value of each one," he points out, referring to the environmental and embedded generation value of renewables as well as the value of the physical electricity.

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